Saturday, September 12, 2015

Quote of the Day

September 12, 2015
Can't afford 15-year mortgage? Then don't buy

While I generally agree with the premise of the article, I would point out that the only people who truly know if they can afford buying homes are the ones who don't need loans in the first place. Therefore, if only those who knew they could afford homes were buying homes then we'd be in the midst of a Great Depression. No doubt about it.

I bought my one and only home in 1997. I was getting married in a month and thought I could afford it. I put 20% down and we had two incomes. A funny thing happened within the next two years though.

1. One of us tended to spend quite a bit more than the other. Go figure.
2. Divorce. Poof. One income vanished.
3. Massive accounting fraud at the company where I worked. Years of accumulated stock options turned to dust.
4. A rapid series of seemingly endless layoffs appeared. I made the cut each time thank goodness. Well, sort of. I eventually quit the hellhole but that's another story.

Had it not been for waiting until the age of 33 to buy a home then any one of those could have easily put me in serious financial trouble. It certainly helped that I had the good fortune of other investments paying off.

In 1999, I was able to pay off the house. I had a mortgage with a 7% rate. As a saver by nature, I wished to remove that burden. My tax preparer tried to talk me out of it. Said I could make more elsewhere. A few years later she had a change of heart on that advice, as you can probably expect. 1999 was not exactly the ideal year to swing for the investment fences.

So where is the quote of the day? It's in the comments.

Author needs to learn about the time value of money. When you can get a 30-year loan at 4% interest when rates are going to far exceed that in the future (and drive up inflation), then you are actually in BETTER financial position the further you push out the loan. The other consideration: most people could not own a home in expensive places like California without a 30-year mortgage. Very superficial article. - Christopher Prince

1. The time value of money argument only works if you can find better investments, much like my tax preparer thought she could do for me. We know one investment that won't work. You certainly shouldn't borrow at 4% to invest in 30-year treasuries yielding just 3%. You could try investing in the mortgages of others I suppose, but wouldn't that seem a bit silly? How about the stock market? Sure thing? Well, maybe. Oh, wait. Maybes can't be sure things.

2. He's absolutely convinced, just like many others seem to be, that interest rates are going to be higher in the future, but not only that he knows with certainty that they will far exceed today's rates. I sure wish I could predict the future with such conviction. Embrace that debt, baby. Can't ever have too much with that mindset.

3. He seems to think that rising interest rates will drive up inflation. Isn't that a bit like saying that carts push horses around? Perhaps he should tell the Fed his theory. If rising rates push inflation up, then falling rates must push inflation down. Woohoo! Now we finally know what's going wrong!

4. He mentions that most people can't afford 15-year mortgages in expensive places like California. He uses that as a basis to say how "very superficial" the article is. Fascinating. I say it is fascinating because the author wrote the following.

The 15-year loan is not for everybody. You can manufacture dozens of excuses as to why it can't work for you, legitimate or otherwise. Some of the more legitimate reasons revolve around specific real estate markets, such as San Francisco, Los Angeles and, of course, Manhattan. Yet those are exceptions to the rule, not the rule.

You would think that someone who can predict the future with such accuracy would realize that San Francisco and Los Angeles are expensive markets located in California. But then again, if you can predict the future then what is the point of reading these articles in their entirety?

I jest. The real reason I picked this as the quote of the day was because at least seven people liked it. One person even gave it an Amen. For what it is worth, I'd say he's preaching to the debt choir. I truly hope that it works out well for everyone, but you won't catch me borrowing money to invest and/or holding my breath. Sigh.


Troy said...

yeah I was going to make the cart-horse statement too.

Nobody gets this, but houses are set right at the line at what the buying pool can afford aka get a loan for, and not a penny less.

interest deduction => higher home prices
two incomes used in figuring DTI => higher home prices
falling interest rates => higher home prices
longer or negative (LOL) amortizations => higher home prices

this is because housing isn't like any other form of wealth, because the land component cannot be manufactured and thus is in very limited supply.

Nobody gets this, really.

Stagflationary Mark said...



The two income thing is a lot riskier than it appears. If the couple is right at the edge of financial stability, then if *either* person loses their job, very bad things will happen. That's two chances instead of just one. I think that's probably why many failed to realize that the economy wasn't as resilient as first thought heading into the Great Recession.

As a side note, I certainly tried to buy the most house I thought I could afford. It wasn't for ego, but because I wanted to buy as few houses in my lifetime as possible. Selling a home isn't cheap, nor is moving. I had no desire to buy a starter house. It seemed better to be a renter and live close to where the jobs took me.

I've lived in this house more than 18 years. So far, one and done. My next house, if there ever is one, may even be a boat. No hurry on that. It's not a great financial move to buy a hole in the water you poor money into perhaps, but you only live once. ;)

Stagflationary Mark said...

Freudian slip!

Poor money into! D'oh!

Troy said...

I think that's probably why many failed to realize that the economy wasn't as resilient as first thought heading into the Great Recession.

Middle-class america was "pulling" $100B PER MONTH out of their homes:

real per-capita monthly growth of household mortgage debt

THAT was the twig that was going to break, and when the lending BS that was powering up home valuations 2003-2006 stopped in 2007 (as all the suicide loans started defaulting) so went much of the basis of post dotcom recovery, such as it was.

I saw all that with much clarity, mostly thanks to CR, in 2005-2006 (Casey Serin appearing in the news was the last puzzle piece I needed to see the full picture).

I honestly have no clue what's powering the economy forward now. shows total debt take-on is about half that of the pump before the 2004 election. corporate profits are fat and happy (back when FRED accidentally had S&P 500 data back to the 80s the long-run correlation between this graph and the S&P was startling).

Boomers are age 51-69 now, edging off into retirement, a double virtue as it induces dissaving while opening up a job somewhere for poor Gen Y.

The boomers have been saving for 30-40 years . . . time to spend!

Stagflationary Mark said...


The boomers have been saving for 30-40 years . . . time to spend!

Could be. What if they have to sell stocks to spend though? I'm 51. I'm retired. I no longer own stocks. Better hope most don't all decide to sell stocks like I did!

Just a thought. No easy answers when trying to predict the future. Sigh.

Troy said...

What if they have to sell stocks to spend though? I'm 51.

Gen Y's time to save!

There's more Gen Y than boomers,too.